RHB analyst Shekhar Jaiswal has maintained his “buy” call on China Aviation Oil (CAO) with a higher target price of $1.25 from $1.15, representing yield of 4% according to his FY2020F estimates.
The higher target price comes amid expectations of continued improvement in China’s aviation traffic in 2021.
Year-to-date, flight traffic at the Shanghai Pudong International Airport (SPA) is already moving ahead of Jaiswal’s expectations, he says.
According to data released by the airport, it has already handled some 270,000 aircraft movements as at October 2020 thanks to a strong improvement in domestic aviation traffic
Annualising the y-t-d traffic would imply that the airport will handle an estimated 325,000 aircraft movements in 2020.
“This, although 58% lower y-o-y, is still higher than our previous estimate of 285,000. Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), which is the sole jet fuelling service provider at SPA, should see better-than-expected jet fuel volumes for 2HFY2020. SPIA, a 33%-owned associate of CAO, accounts for 65% of the latter’s profit before tax (PBT),” says Jaiswal.
The group is also anticipating a strong jet fuel demand recovery.
Jaiswal cites a recent Bloomberg report that CAO is already gearing up for an unexpected surge in air travel even though the Lunar New Year break is over two months away.
The analyst adds that CAO, which is one of the largest buyers of jet fuel in Asia, is seeking to import some 25,000 tonnes of jet fuel for delivery in Jan 2021 – its first buy tender since May.
“While overall jet fuel import volumes in China are expected to remain below 2019’s levels, traders are expecting a rise in Chinese jet fuel imports ahead of the Lunar New Year holidays. We maintain that China, which has managed to keep Covid-19 under control within the country, could see a strong revival in international aviation traffic once an effective vaccine is made widely available in 2HFY2021,” he says.
The group is also currently trading below peer valuation and at a compelling 2021F price-earnings to growth (PEG).
“CAO’s share price has moved up 17.4% in last month, and outperformed the STI by 1.3%. Despite this, its 2021F P/E of 9.8x is below the range of multiples of its global jet fuel-supplying peers, and implies only 0.3x 2021F PEG,” he says.
“CAO’s net cash position of US$406.7 million ($544.4 million) is equivalent to about 59% of its market cap. On an ex-cash basis, the stock is trading at a compelling 4.0x 2021F P/E,” he adds.
“We maintain that in addition to a full recovery in domestic aviation traffic, a gradual but partial recovery in China’s 2HFY2021 international aviation traffic will support 2021F earnings growth. We raise 2020-2022F earnings by 2-4%. Despite the strong share price performance, valuations remain compelling.”
As at 4.24pm, shares in CAO are trading 2 cents higher or 1.9% up at $1.08.
